Venezuela’s Central Bank Director Perdro Maldonado gives details of the new forex system during a press conference last week. (EFE)

Merseyside, United Kingdom, February 1, 2018 (venezuelanalysis.com) - The Venezuelan government has made the unprecedented announcement that it will unify its formerly tiered exchange rate system as part of a bid to overhaul its forex model.

In an official gazette published Monday, the government formally issued the “FX Agreement 39”, representing one of the most far-reaching attempts to liberalise its foreign currency exchange system in more than eight years.

Central Bank of Venezuela Director, Pedro Maldonado, explained that the new model would “establish a mechanism through which private currency offers will replace public offers to generate a private market where buyers and sellers come together in a system”.

The country’s forex system has been under the control of the government since 2003, when it set a single official exchange rate for the Bolivar and became the chief buyer and seller of foreign currency in Venezuela. Though residents could access foreign currency through government bonds, this system was replaced by a more heavily regulated and tiered version in 2010.

The current government has tweaked the post-2010 system several times since 2014, however it has nonetheless maintained a tiered model in which a highly subsidised rate co-exists with a more liberalised exchange rate somewhat controlled by the Central Bank.

Prior to Monday’s announcement, Venezuela’s forex system was characterised by a two-tiered exchange model based on the DICOM and DIPRO rates. While the price of the DICOM was relatively fluid and set by supply and demand in auctions, it was also capped by the government and closed last month at around BsF3345 to the dollar. On the other hand, the subsidised DIPRO rate was set at BsF10 to the dollar and reserved for private and public entities which import “essential” goods such as food and medicine. However, both rates were hugely overvalued in relation to the country’s booming black market, in which dollars are currently sold for approximately BsF235,000.

Analysts agree that the tiered system had become increasingly dysfunctional in recent years, contributing heavily to the country’s soaring inflation rates. An anti-corruption operation begun last year by the newly appointed Attorney General Tarek William Saab also exposed numerous cases in which the system had been fraudulently exploited by national and transnational companies. Saab is on record saying that millions of dollars from the public purse had been laundered after businesses resold subsidised dollars earmarked for imports on the black market for huge profits.

Though the rules of the new system are unclear, the Central Bank has confirmed on Twitter that its new unified exchange rate will be based on a supply-demand system regulated by the state through auctions, and working in conjunction with transnational forex centres and suppliers.

According to Maldonado, the revised system will be centred around an “American auction” style model whereby the price of foreign currency is determined by supply and demand.

“Considering that the Republic will not participate as a seller, the supply of private currency offers is fundamental, either from individuals or businesses,” he added.

In order to access foreign currency, both individuals and business owners will have to register online through the government’s DICOM website. The Central Bank is yet to confirm whether the new system will be capped like the previous DICOM, or whether it will float with no state intervention on the private market.

Nonetheless, the BCV has stated that it will put a limit on the total amount of foreign currency that individuals and business owners can purchase on a yearly basis. While the former will be able to purchase up to €1680 a year, company directors will be allowed to acquire a maximum €340,000 monthly or 30% of their declared monthly net profits.

The government is trying to encourage Venezuelan businesses and individuals to repatriate their savings and any assets outside of Venezuela through the new DICOM, as well as pitching it as a mechanism through which Venezuelan migrants can send remittances back to their families. Forex centres within Venezuela will also be able to sell foreign currency to private buyers.

Though economists state that it is too early to know whether the new system will help Venezuela’s ailing economy, they say the latest move is potentially promising.

“On paper, the new rules imply a significant departure from prior regulations… although the poor track record of authorities in implementing policy reforms suggests caution in any positive interpretations of the new norms,” stated chief economist at Torino Capital Francisco Rodriguez.

“We will have to wait to see the new system in operation in order to understand the full implications of the regulatory changes,” he added.

The government had previously indicated last December that it was seeking to reform the former two-tiered system, though it did not provide details at the time. The new system’s first auction was held on January 25.

Pre-Sale of Petro

Meanwhile the government also launched a new website for its new cryptocurrency, the Petro, and Venezuelan President Nicolas Maduro signed off on white paper officially explaining the proposal on Tuesday.

In a televised cabinet meeting, the head of state also announced that the pre-sale of the currency would begin on February 20 through The Ethereum token standard (ERC20).

According to Carlos Vargas, the government’s cryptocurrency superintendent, the Petro will be initially available for purchase through hard currencies and cryptocurrencies, but not yet in Bolivars.

“Our responsibility is to put (the Petro) in the best hands and then a secondary market [in Bolivars] will appear,” he said.

Vargas also indicated that the state had moved to legalise cryptocurrency trading, and that several Venezuelans arrested by authorities in relation to Bitcoin mining last year would now be released without charge.

The creation of the Petro cryptocurrency was announced in December and has received mixed reviews from economists, though the government is betting on the initiative as a way of circumventing US economic sanctions imposed last August.

“The Petro will be… used as a platform for the growth of a more just and favourable financial system for national development. Currency will be transferred securely and directly in order to avoid blockades and embargoes,” said the president during Tuesday’s cabinet meeting.

Nonetheless, the US has warned that any financial institutions found to be dealing in the Petro will be considered to have violated the Trump administration’s sanctions on Caracas and will be liable to prosecution.

The Petro is to be backed by Venezuela’s vast state oil reserves, and will be mined on cryptocurrency farms by individuals within Venezuela, as well as by young people signed on to a government youth employment programme.

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